Credit Unions: Are You Putting Your Balance Sheet to Work?

Editor’s note: The following article is a contributed piece from the Federal Home Loan Bank of Des Moines, written by John Biestman, Vice President, Senior Relationship Manager.

There’s an old joke that goes like this: An agitated boss exclaims to an employee, “You missed work yesterday, didn’t you?” The employee replies tersely, “No, not particularly!”

All jokes aside, your employees are likely hard at work. But is your balance sheet? Or, more specifically, your cash? The persistence of excess liquidity in the financial system remains an understatement.

The recently released NCUA Quarterly Data Summary for the Second Quarter of 2021 describes a challenging environment for federally insured credit unions. These select items are telling:

Q2 2021 vs. Q2 2020:

  • 15.0% increase in shares and deposits
  • Aggregate Net Worth Ratio: 10.17% vs. 10.46%
  • Net Interest Margin on Average Assets: 2.57% vs. 2.88%
  • Cash and Equivalent Balances: +23.8%
  • Loan-to-Share Ratio: 69.6% vs. 76.3%

So, what should credit unions do in this environment of margin pressure and excess liquidity? Put the cash to work and get it out the door!

That may seem easier said than done with the credit union composite loan-to-deposit ratio now standing at 69.6%, the lowest level on record. It’s a no-brainer that there’s an urgency to expeditiously deploy excess cash into safe and profitable loans and investments.

Credit unions, particularly those that are asset-sensitive, have been executing a variety of growth strategies of late including increasing their portfolio of fixed-rate mortgages, developing innovative product line extensions, pre-funding pending investment maturities, and extending asset durations and funding short.

What do we see the neutral or liability-sensitive credit unions doing? Many are “blending-and-extending” their existing borrowings, including Federal Home Loan Bank advances. Here are some recommended strategies:

  • When funding mortgages, consider using a mix of duration-certain borrowings along with shares and deposits. A blended funding structure can mitigate interest and extension risk. Symmetrical and forward-start borrowing structures should also be modeled. Blended funding can be used to attain spreads in excess of 200 basis points, alongside embedded interest rate risk protection, even in today’s market.
  • Innovate! Market home office loans as a specific niche. Consider unique lending programs such as fully amortizing 10-year mortgages that are designed for those that are soon-to-retire. As many credit union members desire a debt-free retirement, “forced” savings sure beat close-to-zero investment returns in the current rate environment.
  • Build a commercial real estate portfolio using amortizing borrowing structures to fund customized multiple amortization loan terms.
  • Build your auto loan portfolio with blended and amortizing borrowing structures. In the current environment, blended funding rates are well below 1% inside seven-year maturities.

It’s important to remain as close to fully invested as possible. Grow the balance sheet with prudent credit risk. Mitigate rate risk by funding intelligently and diversifying your funding sources. Your shares and deposits support uncertain durations. Blend them with funding sources, i.e. borrowings, that support duration certainty. Liquidity and interest rate conditions are always subject to change. If there was ever a time to preserve future earnings streams and counter unrelenting margin pressure, it’s now. Put that cash to work. You won’t miss it!

Federal Home Loan Bank of Des Moines is one of 11 regional banks that make up the Federal Home Loan Bank System. Established by Congress in 1932 to support mortgage lending, FHLBanks are a stable source of funding for more than 7,300 federally insured depository institutions of all sizes and types, including banks, credit unions, insurance companies, thrifts, and community development financial institutions (CDFIs).

Posted in Industry Insight.